European energy security: political-economy’s issues

Recent extraordinary energy Council’s meeting finished with a right and urgently needed conclusion on the European energy system showing solidarity among the EU states. However, achieving regional energy security European states need to adapt their policies and take additional measures. The Council meeting’s decisions preserve main ideas of the Commission proposal, which include two-stage approach: pre-emptive action and the EU alert mechanism. 

Initially, the European Council asked the Commission to draft an EU-wide contingency plan in the spirit of solidarity. Prepared regulation on a coordinated gas-demand reduction plan was endorsed by the Council and reached a political agreement with a broad support.
Many EU states decided to go for renewables, both because of the high energy prices and uncertainties of supply; others are massively buying solar panels, installing heat pumps and looking for various types of alternatives to fossil fuels.

Combined EU-states’ measures
The EU institutions are doing everything they can to diversify gas supply and improve energy security; however, the EU states have to achieve the target of 60 bcm of available gas capacity, though presently they are at the level of about 35 bcm.
The EU Energy Platform and the Task Force will rapidly take forward and coordinate the work of the five regional groups to make the most effective and efficient use of existing EU-wide infrastructure and resolve appearing problems. Besides, the EU is also moving ahead to facilitate joint purchasing of gas and hydrogen.
With its other EU-policy’s element, so-called RePowerEU plan, the states have to reduce by a third the Russian gas imports, compared to last year. To end present lingering gas vulnerability, more measures are needed: e.g. reduce consumption of gas and make a “solidarity approach”; these steps must be taken, resumed the Council, to make sure that Russian gas supply doesn’t control regional energy security amid higher competition on the LNG market and increasing gas process. Based on the REPowerEU, renewable deployment has been accelerated and there are examples of very positive moves in green energy production this year, as the energy efficiency has become an even more important part of the member state’s recovery plans.
Source: https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_22_4733

Present situation
The Commission’s assessment shows that in case of a full disruption during summer’s months, the states might face a gap of 30bcm in an average winter and 45bcm in a cold winter; besides, the states must take into account the need to fill and refill storage. The figures of 45bcm correspond to a 15% cut in the usual gas consumption between the beginning of August and the end of March 2023: this is a “recommended percentage” to all EU states political economy as the perspective target.
The Council endorsed this Commission’s target level, but has introduced more flexibility to reflect the specific situations of the states: the discussions during the extraordinary Council have shown that while solidarity was necessary, it could work best when varied circumstances of the states were integrated into the EU-wide gas network. Besides, some states do not use gas at all, and countries like Ireland, Malta and the Baltic States have strongly underlined their intention to reduce demand.
The EU actions to secure alternative gas supplies are already bringing tangible results: in the first half of 2022, non-Russian LNG supplies to the EU increased by 19 bcm and pipeline deliveries by 14 bcm. The EU has reached agreements with the US, Canada, Norway, Egypt, Israel, Qatar and cooperating with Algeria. In addition, the EU is exploring the options to increase LNG imports from Nigeria; the country is already the fourth-biggest exporter to the EU, but has potential to contribute even more.
Reference to Commissioner Simson’s remarks at: https://ec.europa.eu/commission/presscorner/detail/da/speech_22_4727

Recent reduction in gas supply from Russia highlighted fears that the EU states will be able to meet goals to refill storage and supply households with gas during the winter. Present EU’s fragile economic growth may be further reduced if gas will have to be rationed.
Before the Ukraine war, Nord Stream transported around 73 GWh per hour to Germany (which is particularly reliant on Russian gas) but also to other European countries. Nord Stream 1 accounts for around a third of all Russian gas exports to Europe. In June, Russian gas supplies were 40% less than normal; they completely stopped during ten days in mid-July as part of planned annual maintenance, though have since resumed supplies. On 25 July, Gazprom announced that it would further halve its daily deliveries via Nord Stream 1, citing the need to maintain a turbine: Russia repeated claims that Western sanctions were to be blamed as they were complicating this work.
Reference to Euronews, 27.07.2022 in: https://www.euronews.com/2022/07/27/fears-of-winter-gas-shortages

Markets and economy’s reaction
Some evidences reflect negative consequences for the market if EU states would pull the brake on soaring gas prices by signaling the 15 percent demand cut: thus, gas prices by the end of July limbed past the €200 per MWH mark, and continued soaring reaching a record €214 for August futures and €217 for November futures, which is almost 10 times more than a year ago.
Compared to the original Commission proposal, ministers in the Council took the power to impose mandatory cuts in an emergency away from the Commission; instead, the Council will have to declare an emergency with a majority vote to trigger mandatory cuts.
Multiple derogations for countries with limited or no connection to the European gas grid make the entire system complex and showing doubts about whether it will work: officials say that present deal “may not even be enough for the Commission to reach its own projected aim of reducing gas by 43 billion cubic meters”, acknowledged Politico Brussels Playbook on 27.07.
In fact, added Politico, the deal yields a gas savings target closer to 10 percent, rather than the original 15 percent.
Greek Prime Minister Kyriakos Mitsotakis proposed an EU-wide mechanism to compensate industrial users for reducing their gas and electricity use for the coming winter, arguing the idea “mixes economic and energy efficiency with European solidarity. Mitsotakis says a scheme to use EU money to subsidize gas reductions “presents a midpoint between the voluntary demand reductions that we must all identify, and the mandatory reductions that might come in an emergency. By offering financial incentives, rather than relying on the penalty of interruptions during an emergency, the proposal is more likely to unlock a firm and sizable response from industry.”

The Greek PM says that a new mechanism would build on already existing schemes that incentivize short-term consumption cuts, which are used to stabilize grids.
This larger scheme would incentivize longer-term reductions of several months rather than hours or days. “Ideally, we would blend national and European resources, demonstrating solidarity and allowing funds to flow to those most capable of reducing their consumption”, he says.

Bottom-line. It’s amazing, that EU’s political economists have been so naïve during last decades about continental gas security!

 

 

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